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Chapter 14: Income Taxes of Estates & Trusts

CHAPTER 14
INCOME TAXES OF ESTATES & TRUSTS

Problem 14 – 1 TRUE OR FALSE

1. False – P20,000
2. True
3. True
4. True
5. True
6. True
7. False – It shall be in writing either as trust inter-vivos or through a will.
8. False – A trustor is the person who establishes the trust, not the trustee.
9. True
10. True
11. True
12. True

Problem 14 – 2 TRUE OR FALSE

1. False – A taxpayer is required to file ITR regardless of the result of business whether
there is income or loss; hence, the ITR of irrevocable trust should be filed if its income is
P20,000 and below.
2. True
3. True
4. True
5. False – The income is taxable.
6. True
7. True
8. False – special deduction related to amount distributed to beneficiary is not allowed
when a trust is administered in a foreign country. [Sec. 61 (C), NIRC]
9. True
10. False – Since the trusts are irrevocable, their income should not be combined with the
income of the trustor.

Problem 14 – 3
1. B
2. C
3. A
4. D
5. B
6. A
7. A
8. B
9. D
10. C
11. C
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Problem 14 – 4 D
Gross income P200,000
Less: OSD (P200,000) 80,000
Net income P120,000
Less: Basic personal exemption 50,000
Net taxable income P70,000

The estate can deduct greater amount of deductions by using OSD. Section 35(C) of NIRC
provides that if the taxpayer dies during the taxable year, his estate may still claim personal and
additional exemptions for himself and his dependents.

In the given problem, Mrs. Ayugat can claim her basic personal exemption of P50,000 but she
cannot claim additional exemptions because her husband is the proper claimant of the
additional exemptions unless the husband waives his right or has no income taxable in the
Philippines.. [Sec. 79(F), NIRC]

Problem 14 – 5

Note: Since the requirement is tax savings, if is to be assumed that OSD shall be used to
determine the lower amount of tax.

Correction: Requirement 2 should be: … of the estate of Mathai’s mother.

1. Letter B
Gross business receipts of Mathai’s estate after death P400,000
Less: OSD (P400,000 x 40%) 160,000
Net income before personal exemption P240,000
Less: Absolute exemption 20,000
Net income subject to income tax P220,000

It must be noted that the P400,000 represents the income of the estate after death. It does not
include the income before death. In this case, the applicable exemption would be P20,000
because the income of Mathai before his death could deduct the basic personal exemption of
P50,000.

2. Not in the choices = P5,000

Income tax when no income of estate was distributed (Case 1 + Case 3)
(P59,000 + P8,500) P 67,500
Less: Income tax when P150,000 of estate’s income was distributed
(Case 2 + Case 4) = (P35,000 + P27,500) 62,500
Tax savings P 5,000

Supporting computations:
Case 1 Case 2 Case 3 Case 4
Gross business receipts 500,000 500,000 200,000 200,000
Distribution to the beneficiary . (150,000) . 150,000
Balance 500,000 350,000 200,000 350,000
OSD – 40% (200,000) (140,000) (80,000) (140,000)
Net income before personal exemption 300,000 210,000 120,000 210,000
Personal exemption (20,000) (20,000) (50,000) (50,000)
Net taxable income 280,000 190,000 70,000 160,000

Income tax for first bracket 50,000 22,500 8,500 22,500

Income tax on excess
Case 1: (P280,000 – P250,000) x 30% 9,000
Case 2: (P190,000 – P140,000) x 25% 12,500
Case 4: (160,000 – 140,000) x 25% . . . 5,000
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Total income taxes 59,000 35,000 8,500 27,500

Problem 14 – 6
1. Letter C
Gross business income P320,000
Less: Business expenses 200,000
Net income before personal exemption P120,000
Less: Personal exemption – basic 50,000
Net taxable income P 70,000

Tax on P70,000 P 8,500

Naty Goc cannot claim the additional exemption of her minor child because her husband
is deemed head of family and proper claimant of the additional exemption. [Sec. 79(F),
NIRC]

2. Letter A
Income tax due – case 2 & case 3 (P2,500 + P4,000) P 6,500
Less: Income tax due – case 1 32,500
Income tax savings – 200y (P26,000)

Case 1* Case 2* Case 3*

Gross income P500,000 P500,000
Itemized (300,000) (300,000)
Amount distributed – child (150,000) P150,000
OSD (P200,000 x 40%) . . ( 60,000)
Net income before exemption P200,000 P 50,000 P 90,000
Personal exemption ( 20,000) ( 20,000) ( 50,000)
Net taxable income P180,000 P 30.000 P 40,000

Tax on P140,000 P22,500

Tax on P30,000 P 2,500 P2,500
Tax on excess:
Case 1: (P40,000 x 25%) 10,000
Case 3: (P10,000 x 15%) . . 1,500
Income tax due P32,500 P 2,500 P 4,000

*Case 1 – Income tax of the estate (no portion is distributed to heir).

*Case 2 – Income tax of the estate (P150,000 is distributed to heir).
*Case 3 – Income tax of the heir (P150,000 is received from estate).

The tax saving is brought about by splitting the taxable income between taxpayers
thus lowering the taxable income to lower tax rate and availing two personal
exemptions.

Problem 14 – 7
1. Letter C
200x 200y
Gross income P 5,000,000 P 6,000,000
Operating expenses allowed (2,800,000) (3,200,000)
Amounts given to beneficiaries
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200x (P680,000/85%) ( 800,000)

200y (P765,000/85%) ( 900,000)
Personal exemption ( 20,000) ( 20,000)
Net taxable income P1,380,000 P1,880,000

Tax on P500,000 P125,000 P125,000

Tax on excess:
200x: (P880,000 x 32%) 281,600
200y: (P1,380,000 x 32%) . 441,600
Income tax due P406,600 P566,600

The absolute exemption of P20,000 is to be used for the income of Mr. Anao’s
estate while Mr. Anao’s income will used the basic personal exemption of
P50,000.

2. Letter A
200x 200y
Amounts received by wife
200x: (P425,000/85%) P500,000
200y: (P510,000/85%) P600,000
OSD (40%) (200,000) (240,000)
Personal exemption ( 50,000) ( 50,000)
Net taxable income P250,000 P310,000

Tax on P250,000 P 50,000 P 50,000

Tax on excess (P60,000) . 18,000
Income tax due P 50,000 P 68,000
Less: Creditable withholding tax
200x: (P500,000 x 15%) 75,000
200y: (P600,000 x 15%) . 90,000
Income tax refund P 25,000 P 22,000
Less: 200x income tax refund 25,000
200y’s tax refund is lower by (P 3,000)

3. Letter C
Amount received by Mr. Tag Anao, son in 200y
(P255,000/85%) P300,000
OSD (40%) (120,000)
Personal exemption ( 50,000)
Net taxable income P130,000

Tax on P70,000 P 8,500

Tax on excess (P60,000 x 20%) 12,000
Income tax due P 20,500
Less: 200y Creditable withholding tax (P300,000 x 15%) 45,000
Income tax refund (P24,500)

A beneficiary of an estate engaged in business has the status of self-employed individual

taxpayer. It follows, therefore, that such beneficiary can claim the itemized deduction or optional
deduction in the computation of his net taxable income. Furthermore, the amount paid to the
beneficiary has not been subjected to business expenses.

Problem 14 – 8 C
Income of trust P400,000
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Chapter 14: Income Taxes of Estates & Trusts

Less: Amount distributed to the heir (P85,000/85%) P100,000

Absolute exemption 20,000 120,000
Net taxable income of trust P280,000

Problem 14 – 9
1. Letter B
Amount received from trust B (P4,800,000/80%) x 20% P1,200,000
Rent income (P285,000/95%) 300,000
Total income before OSD P1,500,000
Less: OSD (P1,500,000 x 40%) P600,000
Basic personal exemption 50,000 650,000
Net taxable income P 850,000

Tax on P500,000 P125,000

Tax on excess (P350,000 x 32%) 112,000
Income tax due P237,000
Less: CWT on amount received from trust
(P1,200,000 x 15%) P180,000
CWT from rent income (P300,000 x 5%) 15,000 195,000
Income tax still due and payable P 42,000

2. Letter C
Trust A Trust B
Net income before exemption P4,000,000 P4,800,000
Less: Exemption 20,000 20,000
Net taxable income P3,980,000 P4,780,000

Tax on P500,000 P 125,000 P 125,000

Tax on excess:
Trust A (P3,480,000 x 32%) 1,113,600
Trust B (P4,280,000 x 32%) . 1,369,600
Income tax due of each trust P1,238,600 P1,494,600

Total income tax due (P1,238,600 + P1,494,600) P2,733,200

In case of more than one trust, the creator of the trust in each instance is the same person and
the trustee in each instance is the same but the beneficiaries are different, the trustee should
make a separate return for each of the trusts in his hands. When a trustee holds trust created
by different persons for the benefit of the same beneficiary, he should also make a return for
each trust separately. (Sections 208 & 215, Rev. Regs. No. 2; Sec. 60 (C)(2), NIRC]

Problem 14 – 10
1. Letter B
Income of the grantor P1,000,000
Income of trust A - revocable 500,000
Total income of the grantor P1,500,000
Less: Total expenses
Grantor – business expense P400,000
Trust A – business expense 200,000 600,000
Grantor’s income before personal exemptions P 900,000
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2. Letter D
Income of trust B – irrevocable trust P200,000
Less: Expenses of irrevocable trust – B 100,000
Net income before exemption P100,000
Less: Exemption 20,000
Net taxable income of all the trust P 80,000

Assume beneficiary opted to use OSD.

3. Letter D
Income of beneficiary P100,000
Add: Share from trust 50,000
Total gross income P150,000
Less: OSD (P150,000 x 40%) 60,000
Net income before personal exemption P 90,000
Less: Personal exemption 50,000
Net income P 40,000

Problem 14 – 11
1. Letter A
The trust is not taxable because it is revocable. The supposed income tax of
the trust shall be included in the income tax of Mr. Tan.

2. Letter D
Net income of Mr. Tan P2,000,000
Less: Basic personal exemption 50,000
Net taxable income P1,950,000

Tax on P500,000 P125,000

Tax on excess (P1,450,000 x 32%) 464,000
Income tax due P589,000

Note: Only the income of irrevocable trust is entitled for special deduction.

3. Letter A
Since the amount given to the daughter is not considered as deduction from irrevocable
trust, such amount is considered allowance. Therefore, not subject to tax.

Problem 14 – 12
1.
Conjugal gross income from estate P5,000,000
Less: Business expense (P5,000,000 x 40%) P2,000,000
Income distributed to beneficiaries 600,000 2,600,000
Conjugal net income P2,400,000

200x income tax due from the estate of Mr. Baguingan:

Income share of Mr. Baguingan’ estate
(P2,400,000 x 50%) P1,200,000
Less: Exemption 20,000
Taxable income P1,180,000
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Tax on P500,000 P 125,000

Tax on excess (P680,000) x 32%) 217,600
Income tax due P 342,600

The estate of Mr. Baguingan will acquire a new TIN and file a separate ITR claiming P20,000
absolute exemption. If Mr. Baguingan has income in 200x prior to his death, such income
shall be filed separately using his TIN and allowed to deduct basic exemption as if he died at
the close of the taxable year.

2.
Compensation income P250,000
Add: Income received from trust 200,000
Total income before personal exemption P450,000
Less: Personal exemptions (P50,000 + P100,000) 150,000
Net taxable income P300,000

Tax on P250,000 P50,000

Tax on excess (P50,000 x 30%) 15,000
Income tax due P65,000

Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be
considered as having availed himself of the itemized deductions. (Sec. 34(L), NIRC)

Alternative solution: If beneficiary opted to use OSD

Compensation income P250,000

Add: Income received from trust, net of OSD (P200,000 x 60%) 120,000
Total income before exemption P370,000
Less: Personal exemptions:
Basic P 50,000
Additional (P25,000 x 4) 100,000 150,000
Taxable income of Mrs. Diana Nievera P220,000

Tax on P140,000 P 22,500

Tax on excess (P80,000 x 30%) 24,000
Income tax due P 46,500

3.
Total amount received by the children P600,000
Multiply by withholding tax rate 15%
Total withholding taxes P 90,000

Problem 14 – 13
Tax savings:
Income tax when no income of estate was distributed (Case 1 + Case 3)
(P122,000 + P8,500) P131,400
Less: Income tax when P150,000 of estate’s income was distributed
(Case 2 + Case 4) = (P86,000 + P42,500) 128,500
Tax savings P 2,900

Supporting computations year Case 1 Case 2 Case 3 Case 4

after death:
Gross income 800,000 800,000 300,000 300,000
Business deductions:
Itemized deductions (260,000) (260,000) (180,000) (180,000)
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Distribution to beneficiary . (150,000) . 150,000

Net income before personal exemption 540,000 390,000 120,000 270,000
Personal exemption (20,000) (20,000) (50,000) (50,000)
Net taxable income 520,000 370,000 70,000 220,000

Income tax for first bracket, P500,000 125,000

Income tax for first bracket, P250,000 50,000
Income tax for first bracket, P140,000 22,500
Income tax for first bracket, P70,000 8,500
Income tax on excess
Case 1: (520,000 – 500,000) x 32% 6,400
Case 2: (370,000 – 250,000) x 30% 36,000
Case 4: (220,000 – 140,000) x 25% . . . 20,000
Total income taxes 131,400 86,000 8,500 42,500

Problem 14 – 14
1. Income tax payable by the trust in 200x:
Income from house and lot P 80,000
Income from hollow block business (P10,000 x 12) 120,000
Income from farm 50,000
Total gross income from trust P 250,000
Less: Related expenses (P250,000 x 30%) P 75,000
Amount distributed to the beneficiary 50,000 125,000
Net income before exemption P 125,000
Less: Exemption 20,000
Net taxable income P 105,000

Tax on P70,000 P 8,500

Tax on excess (P35,000 x 20%) 10,500
Total income tax payable P 19,000

2. Income tax payable from the beneficiary in 200x:

Gross income received from income of trust P 50,000
Less: Personal exemption 50,000
Net taxable income P 0 .

Total income tax payable P 0 .

Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD, he shall be
considered as having availed himself of the itemized deductions. (Sec. 34(L), NIRC)

Alternative solution – if Trust and beneficiary opted to use OSD

1. Total gross income – trust P250,000

Less: OSD (P250,000 x 40%) P100,000
Amount distributed to the beneficiary 50,000 150,000
Net income before personal exemption P100,000
Less: Personal exemption 20,000
Net taxable income P 80,000

Tax on P70,000 P 8,500

Tax on excess (P10,000 x 20%) 2,000
Total income tax payable P10,500

2. Gross income received from income of trust P50,000

Less: Optional standard deduction (P50,000 x 40%) 20,000
Net income before exemption P30,000
Less: Personal exemption 50,000
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Net taxable income (P30,000)

Total income tax payable P 0 .

Problem 14 – 15

Correction: The requirement should be stated as: How much is the income tax due of the two
trusts?

Total net income of trusts (P50,000 + P1,000,000) P1,050,000

Less: Distribution to beneficiary (P10,000 + P20,000) P 30,000
Exemption 20,000 50,000
Net taxable income P1,000,000

Tax on P500,000 P125,000

Tax on excess (P500,000 x 32%) 160,000
Income tax due and payable P285,000

Problem 14 – 16
Note: Since the topic is tax planning and the requirement is tax savings, OSD can automatically
assumed to be used to determine the lower tax.

1. Gross receipts P300,000

Less: OSD (P300,000 x 40%) 120,000
Net income before personal exemption P180,000
Less: Exemption 20,000
Net income subject to income tax P160,000

The P300,000 is the business gross receipts of the estate; therefore, subject to P20,000
exemption.

2. Income tax when no income of estate was distributed (Case 1 + Case 3)

(P59,000 + P8,500) P 67,500
Less: Income tax when P150,000 of estate’s income was distributed
(Case 2 + Case 4) = (P35,000 + P27,500) 62,500
Tax savings P 5,000

Supporting computations:
Case 1 Case 2 Case 3 Case 4
Gross business receipts 500,000 500,000 200,000 200,000
Distribution to the beneficiary . (150,000) . 150,000
Balance 500,000 350,000 200,000 350,000
OSD – 40% (200,000) (140,000) (80,000) (140,000)
Net income before personal exemption 300,000 210,000 120,000 210,000
Exemption (20,000) (20,000) (50,000) (50,000)
Net taxable income 280,000 190,000 70,000 160,000

Income tax for first bracket 50,000 22,500 8,500 22,500

Income tax on excess
Case 1 (P280,000 – P250,000) x 30% 9,000
Case 2 (P190,000 – P140,000) x 25% 12,500
Case 4: (160,000 – 140,000) x 25% . . . 5,000
Total income taxes 59,000 35,000 8,500 27,500

Problem 14 – 17
1. To minimize income tax, Dokling can do the following:
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a. Put his business under irrevocable trust

b. Use OSD instead of itemized deduction because the OSD is greater than the
itemized deduction, and
c. Claim his child’s allowance as amount of distribution to beneficiary from the
income of the trust.

2. Tax exposure before the creation of trust:

Gross income P400,000
Less: OSD (P400,000 x 40%) 160,000
Net income before personal exemption P240,000
Less: Personal exemption 50,000
Net taxable income P190,000

Tax on P140,000 P22,500

Tax on excess (P50,000 x 25%) 12,500
Income tax due P35,000

Note: The allowance is not deductible because the child is not established
as beneficiary of the trust. Furthermore, the business is not in trust.

50% of the business is created as irrevocable trust:

Grantor:
Income tax if 50% is held in trust (irrevocable)
Gross income (50%) P200,000
Less: OSD (P200,000 x 40%) 80,000
Net income before personal exemption P120,000
Less: Personal exemption 50,000
Net taxable income P 70,000

Tax on P70,000 ( 8,500)

Trust:
Income tax if 50% is held in trust (irrevocable)
Gross income (50%) P200,000
Less: OSD (P200,000 x 40%) P 80,000
Distribution to beneficiary 100,000 P180,000
Net income before personal exemption P 20,000
Less: Exemption 20,000
Net taxable income P - 0 -

Beneficiary:
Share from the income of trust P100,000
Less: OSD (P100,000 x 40%) 40,000
Net income before personal exemption P 60,000
Less: Personal exemption 50,000
Net taxable income P 10,000

Tax on P10,000 ( 500)

Tax savings P26,000

Problem 14 – 18
Note: Since the topic is tax planning, the taxpayer should use OSD instead of itemized
deduction because using OSD can give a greater tax savings based on the given data of this
case.
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1. Rent income P 800,000

Less: OSD (P800,000 x 40%) 320,000
Net income before personal exemption P 480,000
Less: Personal exemption 50,000
Net income P 430,000

Tax on P250,000 P 50,000

Add: Tax on excess (P180,000 x 30%) 54,000
Income tax due P104,000

2. Rent income – Property 2 P 300,000

Less: OSD (P300,000 x 40%) 120,000
Net income before personal exemption P 180,000
Less: Personal exemption 50,000
Net income P 130,000

Tax on P70,000 P 8,500

Add: Tax on excess (P60,000 x 20%) 12,000
Income tax due ( 20,500)
Less: Income tax property no. 1

2. Rent income – Property 1 P 500,000

Less: OSD (P500,000 x 40%) 200,000
Net income before personal exemption P 300,000
Less: Personal exemption 20,000
Net income P 280,000

Tax on P250,000 P 50,000

Tax on excess (P30,000 x 30%) 9,000 ( 59,000)

Tax savings P 24,500